Effective Budget Strategy: More R&D, Better ROI

24 September 2013

The author of this blog post, Alexey Porodzinsky (Linkedin) is a Leading Expert of Software Quality Optimization Department at A1QA. Alexei has 2 bachelor degrees and a master`s degree, fluently speaks English and German. Having started his career with web-application testing and become IBM Certified Specialist (Cognos 8 BI), now he manages technical aspects of projects on the pre-sale stage. Being a high-level professional he offers expert analysis of budget-planning strategy that would be of great interest.

Effective budget allocation is a top issue in any company, and depending on the way the budget shares got allocated a company may gain or lose benefit. Having made profound research and performed detailed analysis, we`ve come out with quite curious results. The insight into topic has brought us here.

There are 2 IT budget allocation strategies:

IT budget is formed as a percent from revenue or on the basis of costs per employee; in this case IT budget usually ranges from 2 to 4% of total income.

Budget is formed on the basis of RGT (Run, Grow, Transform) model. It means the whole IT budget is split into 3 parts depending on project development stage, be it RUN, GROWn or TRANSFORMed. No doubt the model has its drawbacks, though it is beneficial from the viewpoint of IT budget-planning.

According to Gartner research conducted at the end of 2012, companies spend up to 66% of their IT budgets for IT projects launch initiatives, i.e. on what needs to be done to implement new IT systems. The remaining funds in 50/50 ratio are spent on maintenance of already implemented systems and infrastructures and to support new development projects i.e. R&D.

Total for the moment, companies can allocate only 17% for R&D needs (i.e. the development of new directions) – here it is necessary to pay close attention – namely, to the increasing budget share for R&D, because 70% of the company income is generated as a result of R&D work.

So, how to increase the share of R&D in the IT budget of a company without changing the desired value of deductions from IT budget and thereby achieving the highest efficiency of R&D and thus increasing the real income of the company? The answer lies in increased attention to the quality of IT projects upon and before their launch. It will free up the necessary funds and direct them to the realization of R&D projects.

This is a common vision to address the issue of maximizing the company’s profits and improve the overall ROI of business assets. The next question is how it is possible to free up the necessary funds? Based on our expertise and years of experience in the area of independent software testing, we assure that this can be achieved by involving independent QA services. The earlier in the development cycle it will be done – the more budget share for R&D will become possible to free up and to achieve the goal of maximizing the profits of the company as a whole, increasing the ROI and R&D activity due to the growth of new directions.

To sum it up all let’s find out how exactly we can increase company’s ROI by involving independent testing services into the project implementation cycle:

QA services enable to cut time for project stabilization thus reducing number of implementation stages as well their duration;

Independent software testing helps IT projects meet the deadlines. It enables companies to mitigate the risks, connected with penalties for delay;

Requirements analysis on a prototyping stage excludes the risk of excessive or unnecessary development;

Performance testing provides the data on the required system configuration, which helps build the optimal architecture chain of design facilities. It saves the expenses at a starting phase and enables to form the strategy of a gradual facilities build-up as a project grows and transforms. Knowing exactly which facilities are required, we lay out money on optimal capacity and do not overpay for innovation facilities;

As a result, it got clear that independent testing services raise the quality of IT projects and help free up about 10% of IT budget funds. It will enable to increase budget directed to R&D by up to 27%, which will in turn boost the profit on the whole by 47% (see infographics).